How do countries go bankrupt?

It started with Iceland, then Greece; now looks like Spain, Italy and a few other countries might be joining the list of countries that are bankrupt.

Now, how on earth can countries, I mean whole countries go bankrupt? What happens if a country goes bankrupt? Why did this happen?

All this started from a tradition of borrowing to live and a spend-thrifty attitude.

India’s population is approximately 120 crores. Assuming 4 members per family, one would roughly need 30 crore houses. If the per family inhabitants reduces from 4 to 3 due to various reasons (we will see later), one would need 10 crore more houses. Every requirement starting from materials to construct the houses, food to household appliances, transport, petrol and other fuel, everything just goes up. Assume that an average of 25 lakhs is required for constructing a house. These 10 crore extra houses will alone cost 250 lakh crores.

Most of this money will be borrowed from banks. When separating from family, that single person has to borrow from banks or other financial institutions heavily to finance his needs of house and related expenditure. If that single person who lives alone loses his job, then, he defaults on the payment. If multiple such people default on loan repayments, banks lose money. Similar is the case for setting up industries and industrial loan repayments. When children leave the family to set up their own place, it becomes the Government’s responsibility to take care of old age people. This causes further debt to the Government.

If the country’s biggest banks do not get proper repayments to the tune of lakh crores year or year, its economy naturally goes down. Banks will not be able to attract customers as they have to hike interests. Savings reduce, loans build up. Banks default one day and when this happens to all the major banks in the country, the country borrows money from World Bank and other countries to pump money into the system. When these loans are also defaulted, the country goes bankrupt.

In the US, this is what nearly happened and this is what is happening in many countries in Europe.

In the 1950s, the number of inhabitants per family in the US was 3.5. Now, it is 2.5. Hence they need 3.5 crore additional houses. The investment on this alone was 350 lakh crores. Defaulting this led to the economic slowdown in the US, mainly.

The Saving Attitude

Indians, in general try to save the money that they earn so that it will come in handy on a rainy day. We are encouraged to save starting from pre-kindergarten. Piggy Banks to FDs, the options are varied. This money is now helping run the entire economy now.

In US and Europe, this is not regular. Whatever is earned is mostly spent, very little goes into saving. While we need to learn how to spend from them, they need to learn how to save from us.

Saving money helps in taking lesser loans from banks when we make a major purchase. It helps in times of real need.

Large Families

When my parents were groom hunting for me, I came across several profiles in matrimony sites that said “we are a close knit family of 4”. 4 people la enatha close knit? Few guys have rejected me because we have a big family. Now, we also live as a nuclear family of 4. But, we have very close contacts and relations with my parents’s siblings and my cousins, their kids and so on. For a small occasion of very close family members alone, we definitely have to invite 50 to 60 people. For someone who was used to thinking big in terms of family, ‘close knit family of 4’ was quite funny.

We never lived as a joint family but we all lived in and around the same area. We always made it a point to ensure cordial ties with our neighbours and friends.

I have never had to cook in 29 years (until my wedding) because someone was always there if my mother had to go somewhere. Athai, perima, paati – someone was there. We would stay with them and eat in their house. Similarly, if they went somewhere, we would host our cousins. It was never formal. In all these years, I have never taken flowers and fruits when I visited someone. Of course, we have shared what we make at home but just to go to their house, it was not a formality. Families have pooled in money to conduct weddings or other functions or to help educate a child. When someone is hospitalized or in any other emergency, 10 people will be there to support the person in need – morally. People recover due to the sheer presence of others!!

Ofcourse, privacy, freedom and individual rights are all important and it is not worth holding on to family if you can’t be yourself. It is best, in the interests of the nation and self to fix the problems that exist in large families than do away with the system completely. This is because the advantages outweigh the disadvantages by miles. It definitely is a bed of roses – it has its own thorns. But there definitely are ways to bypass them. Whatever else it helps in, it definitely will ensure your country doesn’t go bankrupt!! They help reduce recessions and economic downturns.

What happens when countries go bankrupt?

They have to start from scratch and rebuild their economy; use their natural resources to create and grow money. In countries like Iceland where there is a dearth of natural resources, primarily due to geography, this is very hard. It becomes extremely difficult for them to borrow money from any unions, other countries or The World Bank. Citizens have to exert awesome willpower to emerge from those ashes.